In order to improve the living situation of families, increase the purchasing power of households and encourage savings provisions for retirement, new tax measures in Luxembourg entered into force on 1 January 2017.
The changes impacted tax rates and increased the ceilings applicable to certain deductions, including private old-age pension schemes (article 111bis of the law on income tax). As from 1 January 2017, the maximum deductible amount for these policies ranging from €1,500 to €3,200 according to the policyholder’s age is increased to €3,200 regardless of the policyholder’s age. This measure affected both new and existing policies.
If you weren’t paying attention in 2017, now is the time to listen up. This new tax measure for individual pension savings schemes is a good thing: the sooner you save for your pension, the more comfortable your retirement will be. Thinking about your pension makes more sense than ever, especially if you are a young active. There are two main reasons for this. Firstly, when you retire from working life, your income may decrease up to 40% depending on your personal situation (for instance, to benefit from a full pension, you must have paid social security for 40 years) and your standard of living could drop sharply. Secondly, the future of the retirement and pension system as we know it today is uncertain. Even with a massive immigration in the coming years, the proportion of the working population will decrease in Europe. The persistent decline in fertility rates and the increasing life expectancy have led to an ageing population in Europe and the trend is not about to be reversed. According to Eurostat, the Statistical Office of the European Union, by 2050, 17% of the population will be aged 65 or more, 11% aged 80 and older and only 15% between 0 and 14 years old.
In Luxembourg, the legal age for retirement is 65. To be eligible for an old-age pension in Luxembourg you must have held 120 months of mandatory insurance. It is the statutory pension (called the first pillar) based on the “pay-as-you-go” system. Today’s pensions are financed by the social security contributions currently being paid by employed people. The second pillar is the supplementary or extra-legal pension funded by employers for their employees or a part of them. The third pillar is the individual pension savings plan. The individual pension savings plan allows you to top-up your future pension income on your own initiative. By making regular contributions, you build up a lump sum with interest, which you can use when the savings pension plan reaches maturity (usually at pension age). Thanks to the tax reform, you have now the complete freedom of choice. As from 1 January 2017, you may choose a monthly life annuity or capital and monthly life annuity or opt for the payment of the entirety of the accumulated capital. The previous obligation to redeem up to 50% of the accumulated savings as a lump sum has been abolished.
Most pension savings plans offer different possibilities on how the savings are invested. Whatever your choice is, the earlier you start, the higher the return of your savings will be. The amount is linked to the accumulation of interest and capital. Once you start to work, you should subscribe to an individual pension savings plan. The pensioner you will be in the future will thank you for your foresight! And even if you are not that young you don’t have to renounce this kind of savings. Starting an individual pension savings plan at the age of 50 can still be interesting. You still have the time to build up a substantial capital and fully benefit from tax advantages. It is never too late to start saving money!
Barbara Daroca is the Head of Corporate Services at ING Luxembourg.